“[Insurance] pricing can’t be expected to do all the heavy lifting”

With inflation and economic concerns topping global risk reports, insurers are having to respond to counter the double whammy of increased costs and supply chain pressures. For Suncorp Group Limited, parent of Suncorp New Zealand, the response shouldn’t be all about insurance pricing.

Referring to the highest inflation rate in Suncorp’s home market Australia since 1990, group chief executive Steve Johnston (pictured) recently told investors: “Like all our financial service peers, we continue to stare into the considerable headwind of inflation, which is at a 30-plus year high, and has impacted every aspect of the group’s operations.

“For insurance companies, inflation has manifest itself in hardening global reinsurance prices, supply chain disruption, higher loss ratios, and the increased costs of long-tail claims settlement. In addition, across both insurance and banking there remains broad inflationary pressure across operating expenditure and wages.”

In response, said Johnston, Suncorp has put through the necessary price increases that will be earned fully over time.

In Australia, increased claims costs in the period from July to December 2022 were mitigated by the insurer’s stronger pricing and higher prior year reserve releases. In New Zealand, the group’s intermediated and direct channels recorded strong growth through targeted pricing increases aimed at offsetting inflationary pressures on claims and increased reinsurance costs.

‘Not all about pricing’

“But [insurance] pricing can’t be expected to do all the heavy lifting,” asserted Johnston during an investor presentation.

“In inflationary times, scale matters… Our Best-in-Class claims programme has allowed us to be more disciplined in leveraging scale to deliver lower aggregate inflation outcomes when compared to peers. This has been most obvious across home working claims where we have recently renegotiated our builder panel arrangements at a significant discount to current inflationary trends.”

As for motor-related inflation trends, the CEO said these are more industry-wide and global in nature. He cited, among other things, a greater proportion of non-drive repairs versus drivable; restricted capacity within the repair supply chain; and elevated average claims costs from higher second-hand vehicle prices.

“In response,” noted Johnston, “we have added additional repair capacity across drive and non-drive; maximised fixed price arrangements with volume incentives; leveraged our technology platforms; and established dedicated teams to manage ancillary costs such as towing, hire car, and recoveries.

“In long-tail, inflation is assumed in pricing and reserving and is proving to be adequate. But, as expected, we have seen some moderation of prior year reserve releases as these buffers are utilised.”

The Suncorp boss also highlighted that the company’s investment portfolio has been offsetting the transitory effects of peak inflation.

“[Inflation-linked bonds (ILBs)] have been a feature of our portfolio for over a decade and are designed to protect both profit and margin during inflationary times,” Johnston told investors. “The benefits of ILBs are amplified in times where there is a material disconnect between actual CPI (Consumer Price Index) and break-even inflation as there is today.

“The ILBs have worked exactly as anticipated – providing a shock absorber during this period of peak inflation and supporting the P&L as pricing and our ongoing operational improvements earn their way through the P&L.”

In the half year ended December 31, 2022, Suncorp posted a 44.3% increase in group net profit after tax to AU$560 million.

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